Question

ans fully

Question 1 (15 Marks) Table below shows aggregate demand and supply schedules for an imaginary economy. Real domestic output demanded Price level Real domestic output supplied (RM billions) (RM billions) 3000 350 9000 4000 300 8000 5000 250 7000 6000 200 6000 7000 150 5000 8000 100 4000 A. Using the data in the table, graph the aggregate demand and aggregate supply curves for this economy. (7 Marks) B. Determine the equilibrium price level and output for this economy in your graph. (2 Marks) C. Illustrate the market implication if the price level in this economy is 150. (2 Marks) D. Illustrate the effect on the market equilibrium price and output if the demand increases by RM 400 billion at each price level. (4 Marks)

Answer 1

(1)

AD (RM billions)	Price level	AS (RM billions)
3000	350	9000
4000	300	8000
5000	250	7000
6000	200	6000
7000	150	5000
8000	100	4000

Real domestic output demanded = AD

Real domestic output supplied = AS

400 350 300 250 Price level 200 150 -AD (RM billions) -AS (RM billions) 100 50 0 0 1000 2000 8000 9000 10000 3000 4000 5000 6000 7000 Real domestic output (RM billions)

---------------------------------------

(2) At equilibrium point, AD and AS intersects each other.

400 350 300 250 E Price level 200 150 AD (RM billions) -AS (RM billions) 100 50 0 0 1000 2000 8000 9000 10000 3000 4000 5000 6000 7000 Real domestic output (RM billions)

At point E, AD intersects AS.

Hence, the equilibrium price level is 200

and equilibrium output is RM 6000 billions

----------------------------------------

(3) At price level of 150, AD is RM 7000 billions and AS is RM 5000 billions. It means there is shortage in the market at the price level of 150.

-------------------------

(4) Now demand is increases by RM 400 billions at each price level. It will increase the AD by RM400 billions at each price level and shifts the AD to right by RM 400 billions at each price level.

400 350 300 250 Price level 200 -AD (RM billions) -AS (RM billions) New AD (RM billions) 150 100 50 0 0 1000 9000 10000 2000 3000 4000 5000 6000 7000 8000 Real domestic output (RM billions)

New equilibrium point is E1 at the intersection point of New AD and AS curve.

Rightward shift of AD ans AS increases the equilibrium price level and equilibrium output level.